A Little Bit of Guidance on SE Taxation of Limited Partners

The Tax Court provided some additional guidance on self-employment taxation of limited partners in the Soroban Capital Partners case issued on Tuesday November 28, 2023.

Photo by Fajruddin Mudzakkir on Unsplash

For many years we have suggested that taxpayers utilize a manager-managed LLC to save on self-employment taxes instead of using an S corporation. An S corporation has many drawbacks that an LLC taxed as a partnership does not have such as:

• No step-up in basis of the entity’s assets when passing through an estate. The S corporation stock gets a step-up, but the assets held by the corporation retain their current tax cost basis which in most farm S corporations is zero. The member’s interest in the LLC taxed as a partnership will get a step-up under Section 743(b) and this allows the heirs to get a full deduction for those assets (either immediately or through depreciation).